Court backs dismissals under TUPE rules during insolvency

Harris & Co chartered accountants Northampton report that a new Court of Appeal ruling has made clear that administrators who dismiss employees before the sale of an insolvent business are not judged to be acting unfairly under the rules governing TUPE, opening the way for staff numbers to be reduced if necessary to keep a business going until sold.

The ruling follows a case heard by the Court of Appeal involving employees of Crystal Palace football club. When the club went into administration in January 2010, the administrator sought to sell it as a going concern. In May of the same year the administrator found the club had severe cashflow problems and decided to ‘mothball’ the club for some months in the hope that a sale could be achieved at a later date.

As a result, four of the club’s administrative staff were made redundant. Their claim for unfair dismissal was originally turned down, and they then brought a case at an employment appeal tribunal (EAT).

The EAT decided that the dismissals were automatically unfair under TUPE rules which state that a dismissal for a reason connected with a transfer of a business will be an automatically unfair dismissal unless the employer demonstrated that the dismissal took place for an economic, technical or organisational (ETO) reason entailing changes in the workforce.

The EAT took the view that in the Crystal Palace case the ETO defence did not apply since the dismissals were ‘part and parcel of a process, with the purpose of selling the business’, rather than for reasons connected with continuing to conduct the business.

The subsequent Court of Appeal ruling reverses this decision.

Richie Alder, employment partner at law firm Trowers & Hamlins said: ‘Administrators of insolvent companies will be breathing a sigh of relief, as this decision provides them with scope to dismiss staff in order to keep the business afloat until a buyer can be found – without these dismissals being found to be automatically unfair.’